Treasury 10-Year Yield at Lowest This Year on Fed, Auction Sizes

By Susanne Walker -
May 1, 2013

Treasury 10-year yields traded at the
lowest level this year on bets the Federal Reserve will affirm
its commitment to the pace of bond purchases to support growth
and as the U.S. said it may reduce debt-auction sizes.

Benchmark 10-year notes gained as a private report showed
employers added fewer jobs than forecast last month. Treasuries
capped a third monthly gain yesterday on signs the U.S. economic
recovery is losing momentum, reinforcing speculation the Fed
won’t scale back unprecedented monetary stimulus, known as
quantitative easing, or QE, following a two-day meeting ending
today. The Treasury said it may decide to “gradually” cut
coupon auction sizes as deficits decline and plans a floating-
rate note sale as early as the fourth quarter.

“Cutting and tapering QE is not going to be in the cards
for quite some time,” said Justin Lederer, an interest-rate
strategist in New York at Cantor Fitzgerald LP, one of 21
primary dealers that trade with the Fed. “Data continues to be
weak. Part of issuing floaters was the expectation that shorter
maturities may be cut a little bit. I would be surprised to see
longer maturities cut in size.”

The benchmark 10-year yield declined six basis points, or
0.06 percentage point, to 1.62 percent at 11:23 a.m. in New
York, reaching the lowest level since Dec. 11, according to
Bloomberg Bond Trader prices. The 2 percent note maturing in
February 2023 added 1/2, or $5 per $1,000 face amount, to 103
15/32.

Treasury Auctions

The U.S. will sell $32 billion in three-year notes, $24
billion in 10-year debt and $16 billion in 30-year bonds on
three consecutive days starting May 7, the Treasury announced.

The Treasury said it may gradually decrease coupon auction
sizes and estimated the first floating rate auction will be held
in the fourth quarter this year or in the first quarter of 2014.

The U.S. budget deficit will drop to $476 billion in 2016
from a record $1.4 trillion in 2009, according to data from the
Congressional Budget Office. The federal government will post an
$845 billion deficit this year, the first time in five years
that the shortfall has been less than $1 trillion, according to
the CBO.

“We’ve expected the gradual decrease in deficits as time
progresses,” said Lederer of Cantor Fitzgerald said. “It will
be smaller going forward.”

Floating Notes

Treasury said a final rule on the floating-rate note
auction is planned for coming months, with a first sale
estimated to occur either in the fourth quarter this year or the
first quarter of 2014. The department said it will use the
weekly high rate of 13-week Treasury bill auctions as the index
for the notes.

“Less supply would give the Fed a greater portion of
what’s out there, which in effect would step up the power of
their purchases,” said Jason Rogan, director of U.S. government
trading at Guggenheim Partners LLC, a New York-based brokerage
for institutional investors.

U.S. government securities returned 1.1 percent in April,
according to Bank of America Merrill Lynch indexes. The Standard
& Poor’s 500 Index (SPX) of shares gained 1.9 percent including
reinvested dividends, data compiled by Bloomberg show.

Economic Data

The ADP Employer Services report showed that employers
added 119,000 jobs last month, compared with a forecast of
150,000 jobs in a Bloomberg News survey of economists.

U.S. gross domestic product grew less than economists
forecast in the first quarter, the Commerce Department said
April 26. Business activity in the U.S. unexpectedly shrank in
April for the first time in more than three years, the MNI
Chicago Report said yesterday.

The Federal Open Market Committee plans to release a
statement at 2 p.m. after a meeting in Washington. None of the
47 economists in a Bloomberg survey taken April 25-29 expects a
decision at this week’s meeting to change the pace of its asset
purchases.

“Over the past two months, we’ve started to see economic
data slow down,” said Larry Milstein, managing director in New
York of government-debt trading at R.W. Pressprich & Co. “It’s
full speed ahead on QE.”

The Fed is buying $85 billion of bonds each month to put
downward pressure on borrowing costs. While Chairman Ben S.
Bernanke said after the previous meeting on March 20 that
further labor-market gains were needed to consider reducing
monetary easing, minutes showed several officials discussed
slowing the pace of buying.

The central bank plans to purchase $44 billion in
Treasuries this month, just below the $45 billion monthly target
given that it purchased about $46 billion of the securities in
April. The Fed spent $2.3 trillion on Treasury and mortgage-
related debt from 2008 to 2011 in the first two rounds of its
stimulus policy known as quantitative easing.